8 August 1997 External T.I. 9719235 - REFUND OF RPP OVER-CONTRIBUTIONS

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Has Department developed an administrative position concerning a refund of excess (undeductible) contributions made to an RPP in error.

Position: YES

Reasons:

Confirmed Source Deductions' (now Trust Accounts Division) position on the matter. Refund not taxable except where refund from defined benefit plan after the year in which excess contribution made. In that case excess contribution may be deductible. Interest on refund, payment of which is permitted by the plan terms, should be reported as a 56(1)(a)(i) amount.

XXXXXXXXXX 971923

Attention: XXXXXXXXXX

August 8, 1997

Re: Return of Undeductible Employee Contributions

This is in reply to your letter of July 11, 1997, in which you ask whether the Department has a position concerning the tax treatment and information slip reporting of a return of employee contributions paid to a registered pension plan ("RPP") in error. In the case you describe the contributions are not deductible to the employee.

The Department's general position on this issue is contained in paragraph 11 of Interpretation Bulletin IT-167R6. (Copies of Interpretation Bulletins are available from your local tax services office or on the Internet at the following site - http://www.rc.gc.ca). Amounts out of an RPP are taxable to the recipient in the year of receipt pursuant to subparagraph 56(1)(a)(i) of the Income Tax (the "Act") even if such amounts were not deductible from the contributor's income. Such amounts are reported on a T4A slip and are subject to source deductions.

The Department's Trust Accounts Division, however, has developed an administrative position with respect to the refund of undeductible contributions (hereafter referred to as "over-contributions") from an RPP to the individual, as follows:

1.If the over-contribution occurs and is refunded within the same calendar year, the T4 slip of the individual should reflect the correct RPP contributions (excluding the over-contribution). No T4A slip should be issued for the refunded over-contribution). No T4A slip should be issued for the refunded over-contribution.

Thus, the Department does not treat the refund as a paragraph 56(1)(a)(i) benefit, no reporting of the amount is required, and the amount is not subject to source deductions.

2.If the over-contribution is not refunded until a subsequent year, the following criteria apply:

(a)Where the over-contributions are being refunded from a defined contribution plan (also known as a money purchase plan), the employer will be required to amend the individual's T4 slip for the year the over-contribution was reported, reducing the RPP contributions and correcting the pension adjustment ("PA") (where applicable). No T4A slip should be issued for the refunded contributions.

The tax treatment accorded the refund is thus similar to that described under 1 above.

(b)Where the over-contributions are being refunded from a defined benefit plan, they will be reported on a T4A for the year in which the over-contributions are being returned. The T4 which originally reported the over-contribution will only be amended where the PA needs to be corrected. In such cases the PA will only be amended on the prior year T4, and the T4A for the refund must be issued for the year when the over-contribution is refunded.

It should be noted that over-contributions to a defined benefit plan can arise from current and/or past service contributions and may not be recognized until one or more years after the fact. In many instances these over-contributions may have been made "as provided by the plan" and consequently the contributions are deductible by the contributor for the year they were made.

In this situation, if the over-contributions were made in accordance with the plan as registered as required by subsection 147.2(4)(a) of the Act, they may be deducted for the year they are made (with respect to current service or post-1989 past service contributions to the RPP). The refund of such amounts will be treated as a subparagraph 56(1)(a)(i) benefit which must be reported on a T4A slip and which is subject to source deductions. If the PA for the year the over-contribution is made is in excess of the limit permitted by subsection 147.1(8) of the Act, the refund to reduce the excess benefit accrued under the RPP is permitted, as you point out, under subsection 8502(d)(iii) of the Income Tax Regulations. In this situation the Department requires that the T4 slip for the year of the over-contribution be amended to reduce the PA.

You also ask how the interest on an over-contribution paid to the individual is treated. In our view a payment of such interest is not a benefit or distribution permitted by paragraphs 8502(d)(c) or (d) of the Income Tax Regulations unless it is explicitly provided for in the plan and constitutes the payment of a reasonable administrative or similar expense incurred in connection with the plan. (See the Explanatory Notes to paragraph 8502(d) released by the Department of Finance July 31, 1991.) If so provided for, the payment of such interest should be reported as a superannuation or pension benefit on the T4A slip.

We trust the foregoing comments assist. If you have any further questions concerning the administrative position described above, please contact your local tax services office. Further questions concerning interpretation of the legislation may be addressed to us.

Yours truly,

for Director
Financial Industries Division
Income Tax Ruling and
Interpretations Directorate
Policy and Legislation Branch